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Bulk Execution Problem

We track many market indices at MCM, one being the spread between what “Bulk” investors pay for various loan rates and programs versus hedge instruments, including TBA mortgage-backed securities. The chart below illustrates what has recently happened to an important market spread relationship. The spread is calculated by taking the average bid price from 12 different bulk correspondent investors minus the TBA UMBS 3.0 security plus OAS servicing value adjusted for roll. Higher values reflect higher execution for IMB Sellers on any given day. Lower values on this spread mean IMB’s are selling at lower pricing versus their hedged position.

(the following graph is one of several reflecting different rates and products, updated daily and posted to the MCM website for client viewing)

Recently this indicator went off the charts to the downside as the bid for servicing included in the bulk buyers bid plus stips all but disappeared. This is a problem for all mortgage bankers unable to service their loans as they are forced to sell at below-market pricing without other executions available to them. For those that can invest in servicing and sell loans retained either through the cash windows or securitize the loans into UMBS or GNMA securities, they can switch to retained sales and circumvent the spread decline. This allows a fair economic booking of the servicing value vs. selling into a bulk execution temporarily impacted by the pandemic and its effects. During the financial crisis of 2008, SRP values for loans sold servicing released went negative and many IMB started retaining the SRP vs. paying investors to purchase the servicing.

Why is this happening? The primary reason is that correspondent investors price their bulk bids based on the TBA prices they will receive from custom pools and pools stipulated with certain features like new production and low loan balance. These stips provide them with a much higher value for their securities compared to the pricing on any TBA screen. Also, LLPA adjustments like high balance were previously watered down and are now being charged at full cost. In addition, they forecast higher losses and cash flow requirements as a result of increased servicing costs and have widened margins to offset increased risk and higher hedging costs. Furthermore, many investors have reached maximum capacity given the avalanche of refinancing pipelines coming to market. This all combines to generate significantly lower bulk bids or no bids in many cases, as firms are strapped for cash.

In addition to lower bulk pricing levels, we have seen lower securitized and cash pricing levels versus TBA security pricing. All not good to your mark levels….

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